Second Mortgage Loans for Bad Credit: A Guide

By: Aaron Robbins0 comments

A second mortgage loan is a type of loan that allows borrowers to access additional funds by using their home as collateral. Often used by homeowners to finance home renovations, consolidate debt, or pay for other major expenses, second mortgages can be a great way to unlock funds sitting in your home’s value and propel your personal finance or business forward.

However, obtaining a second mortgage loan can be difficult for people with bad credit ratings. Don’t let the past slow you down from moving forward with a second mortgage loan application. We discuss how you can access a second mortgage even with a poor credit score.

What is a Second Mortgage Loan?

A second mortgage loan is a loan that is secured by a borrower’s property when they already have an existing home loan or investment loan over the property. With the home as security for the loan, it means that if the borrower is unable to repay the loan (known as ‘defaulting’), the lender can foreclose on the home and use the sale proceeds to recoup their losses. Second mortgage loans (as the name suggests) sit second in line to an existing mortgage.

What are second mortgages used for?

The beauty of second mortgages is that they can be used for a wide array of personal or professional needs. For example, if you have sufficient equity sitting in your property value, you could take out a second mortgage to perform a debt consolidation, fund lifestyle expenses, perform renovations to further boost your property equity, expand your business, put on staff, re-fit an office or business space, pay off money owing to the ATO and more!

Why is it difficult to obtain a second mortgage with bad credit?

Obtaining a second mortgage can be difficult for anyone, but it can be especially challenging for people with bad credit. This is because lenders use credit scores as an indicator of a borrower’s ability to repay their debts. If a borrower has a low credit score, lenders may deem them as a higher risk and be less willing to lend them money.

In addition, lenders may also be hesitant to approve a second mortgage for someone with bad credit because they may already have a first mortgage on their home. If the borrower defaults on their first mortgage, the lender of the second mortgage may not be able to recoup their losses because the first mortgage lender has priority in the event of a foreclosure.

Can I use a second mortgage instead of a business loan?

What many people don’t realise is that, if you’re a business owner, you can access a second mortgage through private funding and put the money towards business purposes. For start-up businesses, second mortgages are an attractive option over personal loans or business loans as they don’t come with the same strict credit criteria. For start-ups, their cash flow is yet to get up and running in most instances, but they still need the working capital to get them going. This is why many turn to business loans, then come unstuck when it comes to meeting the credit criteria of the major banks.

How to Obtain a Second Mortgage with Bad Credit

While obtaining 2nd mortgage loans with bad credit can be difficult, it is not impossible. Here are some tips to help you get approved for a second mortgage:

Improve Your Credit Score

One of the best ways to improve your chances of getting approved for a second mortgage is to improve your credit score. However, this is sometimes easier said than done — especially as it doesn’t happen overnight. If you need urgent cash, then you don’t have the years that it can take to lift a poor credit score.

Obtaining a copy of your personal or business credit report though, can help in identifying where things have gone wrong, what to improve, and of course allows you to see if there are any errors on your credit file that you need to dispute.

Find a Co-Signer or guarantor

If you have a friend or family member with good credit, you may be able to obtain a second mortgage by having them co-sign the loan. It is important to note that co-signing a loan can be risky for the co-signer, as they will be held responsible for the loan if you default. This means that they will be responsible for repaying the loan if you are unable to, so it is a big commitment.

Given that your co-signer or guarantor will be held responsible for the loan if you default, it’s vital to recognise and respect the risk that they take, and ensure that they too, understand the risks and responsibilities of signing with you.

Shop Around for Lenders

Not all lenders have the same requirements for second mortgages, so it’s important to shop around and find a lender that is willing to work with you. Some lenders specialize in working with borrowers with bad credit, while others may be more strict in their lending criteria.

Did you know: At Diverse Funding Solutions, we have access to over 200 of Australia’s top private lenders?

Consider a Private Lender

If you are unable to obtain a second mortgage due to bad credit, then a private lender may be your best option. Unlike traditional lenders and financiers who are bound by strict lending criteria and require credit checks, private lenders are able to offer more flexibility and work with you, rather than trying to fit you into their rigid criteria.

Private lenders work to arrive at a mutually viable solution for funding your second mortgage, by devising an appropriate exit strategy and then structuring how you’ll repay the loan through a repayment schedule.

The benefits of using a private lender for a second mortgage over a traditional mortgage lender

If you or your business has a bad credit history, then following the mainstream lending path may not be for you. The benefits of using private lending for second mortgage finance includes:

  • Working with lenders who aren’t bound by credit criteria, and instead look at your unique circumstances to devise exit strategies and repayment schedules.
  • An efficient application process. Forget the tedious and drawn-out process that most borrowers and business owners are accustomed to with traditional lenders and mortgage brokers — private lenders are able to process applications quickly and efficiently, with minimum documentation.
  • Access to flexible loan terms. Most home loans offer limited loan terms, whereas a private lender can provide flexibility with loan terms.
  • Offering competitive interest rates. This is particularly beneficial in the current high-interest rate environment.

Which private lender offers the best second mortgage finance?

Looking for the best private lender for your second mortgage finance doesn’t need to cost you endless amounts of time. At Diverse Funding Solutions, we have access to a pool of over 200 of Australia’s top private lenders.

If you have bad credit and want to look at your second mortgage loan financing options, reach out to the team at DFS — we’re here to help!

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